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September 30, 2022

UK food SMEs look for silver linings amid sterling weakness

The recent volatility in the British pound is set to heap more pressure on manufacturers’ costs but some predict help for overseas sales.

By Dean Best

This week’s latest downward pressure on sterling has heightened concerns among weary UK food SMEs about input costs, although manufacturers insist they see a potential benefit for their export operations.

At 17:28 BST today, the British pound stood at $1.111 against the US dollar, recovering losses since the UK government’s controversial “mini-Budget” announcement last Friday – and up from Monday’s all-time low against the greenback of just under $1.04.

The plunge sparked a crisis in debt markets and, on Wednesday, the Bank of England took action, buying GBP65bn of bonds to try to calm the situation. In turn, sterling moved upwards but it remains lower than when Prime Minister Liz Truss took office on 6 September and down more than 17% since the start of the year.

The latest volatility has added to anxiety among some small- and mid-sized UK food manufacturers importing raw materials and ingredients.

“We are anticipating an increase in our input cost of around 3%,” Harry Thuillier, the managing director of UK ice-cream maker Oppo Brothers, says.

Others said existing contracts mitigated against the recent weakness in sterling but warned of pressure should the situation continue.

“We have contracts in place for a lot of our ingredients and raw materials that we use to make Joe & Seph’s Gourmet Popcorn so hopefully not too much [impact] in the immediate term but ongoing we’ll see the cost of materials made outside of Europe increase in price as these are often purchased in US dollars,” Adam Sopher, co-founder of UK snacks maker Joe & Seph’s tells Just Food.

Sopher’s comments were echoed by Rod Addy, the director general of UK trade body The Provision Trade Federation.

“In the short-term, in many cases, the impact of the weaker pound will be minimal, as a lot of our members hedge their currency deals for six to nine months,” Addy said.

The Provision Trade Federation is a food trade association representing manufacturers in areas such as dairy, meat and seafood.

Addy added: “In the longer term, currency volatility creates uncertainty, which interferes with business planning. A weaker pound also means you can buy less processing ingredients and equipment on international markets for your money.”

UK SMEs, often offering products priced at a premium, are watching domestic and international economic conditions closely. At home, few would dispute the economic gloom surrounding the country and enveloping consumers, not least from the pressure of inflation. It emerged this week UK food prices have risen by more than 10% this month and there’s no question more and more consumers are scrutinising what – and how much – they buy.

According to the latest income tracker put together by UK grocer Asda, the majority of UK households are “notably worse off compared to this time last year, as spiralling living costs continue to outstrip wage growth”.

If the weakness in sterling is prolonged and contributes to the upward pressure on the cost of inputs like energy and ingredients, it may become part of already challenging conversations between manufacturers and UK retailers over price increases.

“Whilst pricing conversations are never easy, we’ve found most customers have been fairly understanding – they are well aware of what’s going on in the world and have generally been pragmatic in their approach, albeit while thoroughly scrutinising evidence that the cost increases are genuine,” Thuillier says.

“The current weakened pound is another negative pressure and, if it sticks around longer term, will need to be factored into our future pricing. We are however trying to soak up as much of the added costs as we can and only pass increases on when absolutely necessary – there’s no point in creating our ice cream if it’s too expensive for anyone to enjoy regularly.”

Addy says the Provision Trade Federation’s members have said retailers “are showing willingness to be flexible”, with customers acknowledging the rising cost of inputs, particularly from overseas.

However, both suppliers and grocers recognise the pressure consumers are under, Addy reflects, before outlining another factor shaping the dynamics in UK grocery.

“Competition among the top grocery retailers will also exert downward pressure on pricing and the entry of Aldi into the top four supermarket rankings increases that level of competition,” he says. “It’s a delicate balance. Retailers will not want to put so much pressure on suppliers that they can’t afford to supply them and therefore look elsewhere.”

Some SMEs were this week looking for notes of optimism in the pressure on sterling, with exporters among the UK’s smaller food makers seeing an opening.

“It’s a huge opportunity for us, particularly in the US where we have grown substantially this year – our gourmet popcorn is now 22% cheaper for US retailers to buy than it was just six months ago,” Sopher at Joe & Seph’s says.

Oppo Brothers – a supplier of low-sugar, low-fat ice cream set up in 2014 – generates around half its sales in export markets. “If the pound stays weak – or weaker – import of our ingredients will become even more expensive, squeezing our margin even further [but] we can offset some of the forex exchange rate impact and accelerate our mission to create a future where indulgent ice cream is healthy and be the number one better-for-you ice cream in Europe,” Thuillier insists.

Addy cautions that, for some SMEs, there may be no immediate benefit in export markets and takes a more cautious longer-term view. “Short-term there may be no benefit to exports, as orders are fixed at certain currency rates for months in advance. Longer term, a weak pound may well make UK exports more attractive for US or EU countries. On the other hand, UK buying power relative to competitor countries would fall, so this could have an impact on the availability and expense of imports,” he says.

Food manufacturers operating in the UK, particularly small- and mid-sized firms, will be hoping this week’s choppy economic waters will be a little calmer in the days ahead.

The weakness in sterling in recent days, prompting the Bank of England into its emergency intervention, only adds to the uncertainty facing companies already dealing with a range of problems, even if many entrepreneurs, by their very nature, seek to push on and grow their businesses no matter the economic conditions.

Addy, however, does give an indication of the pressures executives are under.

“The big frustration for members is the lack of certainty and ability to plan. It makes it difficult to manage strategy. There’s also a lot of general weariness and fatigue, as the industry has been hit by so many massive changes, from Brexit to Covid to the Ukraine conflict and now the energy crisis that the pace just seems relentless at the moment,” he says.

“Longer term, the issue of supply chain security is huge. The UK food chain is significantly reliant on imports, leaving us vulnerable to any international supply chain disruption. Guaranteeing supply in many areas will be crucial to long-term planning in the future.”

And the price of energy remains a burning issue for manufacturers in the UK, as it does across sectors and across geographies.

“The issue of energy security, not just price, for example, is still a factor across Europe – we need a greater variety of plentiful energy sources to draw on if we are to continue to avoid the spectre of energy rationing,” Addy says.

“It’s worth bearing in mind that the UK is not alone in facing soaring input costs for energy and raw materials and even labour shortages. Europe and many countries outside the Eurozone are also facing these things, with talk of a Europe-wide recession as well. Many of these issues have been caused by the fall-out of the pandemic and the impact of climate change, with droughts across many regions impacting harvests. Any energy security strategy will therefore have to prioritise green energy in order to reduce the impact of climate change.”

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